All is not sheepshape on the farm

The sheep industry is fighting for its life as farmers turn to dairying and forestry for better returns. How has it got to this and what can be done?

As much as anyone, John Gregan has worked hard to engineer a revival of sheep farming.

He is a founder of a ginger group that at its height drew hundreds of farmers to meetings in both islands with a determination to force a restructuring of the fiercely combative meat industry.

The group succeeded at electing members to the boards of the co- operatives running the two biggest companies, in one case famously toppling a chairman, but failed in its ultimate objective.

Disappointed and frustrated, Mr Gregan is now turning his back on sheep farming and converting to dairying.

"I hate to be seen as leaving a sinking ship," he says. "But I have a young family and I have to do what's right for them. The plain fact is I can earn four times per hectare from dairying than I can from sheep."

Mr Gregan farms on easy country near Timaru and has land suitable for dairying. Dissatisfied sheep farmers on steep hills do not have that high-value option. However, they can put their land to other uses, and are doing so.

Federated Farmers president Don Nicolson expects to have sold all his sheep by the end of winter and will rely on dairy grazers for a living on his farm near Invercargill.

"In 30 years in the sheep industry I've made as much or better than the average wage just three times. I can't keep on like this," he says.

Forestry is another attractive option now that the emissions trading scheme is under way. Foresters say that at a carbon price of $22 a tonne it is possible to make an 8 per cent return on capital, much more than from sheep and beef on hill country.

Bruce Wills, who farms near Te Pohue in the hills beside the Napier- Taupo highway, is surrounded by farms for sale. "Most of the lookers are offshore investors intending to plant trees," he says.

He was spurred by drought to borrow to increase his farm's resilience, digging dams and putting in new fencing, but wonders if it was a good investment. "It might be better to close the farm, put it in trees and go to the beach."

The frustration is evident in his voice. "I could make more money per hectare doing nothing and enjoying the carbon credits rather than working seven days a week eking out an existence, producing world-class meat and fibre products and not being paid nearly adequately enough for them."

Is the death knell sounding for the once-mighty sheep industry? There's no doubt sheep numbers are falling, although recent droughts have skewed the figures, and meat companies are being forced to compete aggressively for lambs. Some are leasing farms and raiding stock sales for sheep and cattle to grow so they can be sure of supply.

Even with record prices for lamb in affluent markets in Britain and Europe, many farmers complain that their share of the bounty is pitiful. A determinedly high kiwi dollar and rising costs see to that.

Sheep farming is no longer the great money-spinner it once was. Wool, which 50 years ago was a bigger earner than meat, is now at subsistence levels, its returns barely covering the cost of shearing. And although farmers are far more efficient at breeding fertile, hardy and meaty sheep, the income is not enough for many who have been caught with high overheads in a tight economy.

A pessimistic mood is pervading the industry, admits Meat & Wool New Zealand chairman Mike Petersen, but he insists sheep farming is not in bad shape.

The emergence of an increasingly wealthy Asian population is a sure sign better times are around the corner. "Farmers have to decide if they want to take up that opportunity," he says. "They won't do that with a mindset that's negative and looking backward."

Some farmers are struggling but he is also encountering many who are doing exceptionally well.

Shrewd farmers can have "a bit of everything".

"If you want to plant some trees on your steeper country you can; if you want to capitalise on the wealth of the dairy industry you can. Then you can concentrate on what you really want to do, which is to farm sheep and cattle."

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The problems holding the industry back are on either side of the farm gate. On the farm, Mr Nicolson says, farmers are battling constantly rising costs, the worst of which are being imposed by central and local government.

Latest research shows farm costs escalated 65 per cent over the past 10 years and that this year farmers will make a profit of only $9 a lamb.

"Out of that, my discretionary income will be $3. Compare that with a senior public servant on $400,000 with a take-home pay of $270,000. To get that same discretionary income I would have to sell 90,000 lambs. It's not sour grapes, they no doubt deserve that, but that is the imbalance in New Zealand today."

It is why Federated Farmers is fighting so hard against the Government's latest impost, the Emissions Trading Scheme, he says.

Mr Petersen agrees farm costs are the biggest drag on the industry. He urges farmers to bargain hard. "Make sure you are constantly putting pressure on who you buy your fuel off, on your farm merchandise store, the stock and station agents and the electricity retailers."

Beyond the farm gate, the meat industry, with its processing over- capacity and fierce competition for stock supply within New Zealand and for sales in lucrative markets overseas, is another source of concern.

After an Agriculture and Forestry Ministry report last year warned of a dire future if the industry did not change its ways, a search for a new strategy was launched. Farmer body Meat & Wool, meat companies' representative the Meat Industry Association and government agencies Trade and Enterprise and MAF are taking part and expect to have a report written by the end of this year.

Mr Petersen admits the fabled silver bullet is unlikely to be found but is hopeful of "half a dozen key issues that we can agree to progress as a sector".

Most crucial to the success of a strategy will be agreement among meat companies. Going by past experience, no-one is holding their breath.

The companies, a mixture of farmer co-operatives, overseas ownership, one-man entrepreneurs and publicly owned with a dominant shareholder, are aggressively competitive.

Keith Cooper, chief executive of co-operative Silver Fern Farms, says he used to be dismissive of people who claimed the meat industry was culturally inept and governed by egos. "But now I sense that it probably is."

He dismisses suggestions that a merger of two or more companies to make a dominant player is the answer. "It will help, but it is just a Band-aid. The basic problem will still remain."

The problem is that the companies are attempting to sell lamb to people in portions that are too big, he says. He has just returned from visiting supermarkets in Britain and Europe and rarely found any meat, apart from New Zealand lamb, in packages bigger than 1 kilogram.

"But we - New Zealand - are still selling half shoulders, whole shoulders and lamb legs."

Silver Fern has decided to package its lamb in 400g packs. Silver Fern is also a partner with PGG Wrightson and Livestock Improvement in seeking government Primary Partnership funds for a project to reorient the production chain from the market back to the farmer to closely match customer requirements.

Mr Cooper also questions why companies are selling 40 per cent of lamb leg production into one market, Britain, of which 70 per cent is sold at cut-rate promotional pricing.

"We're still production-led. Where's all the enthusiasm for how we market the product?"

The full benefits of changes like this would be felt only with wide industry acceptance.

"We have to put aside our squabbles and baggage."

Mr Wills says farmers have the power to force the companies to change by choosing who they sell their stock to. He has changed from a privately owned company to a co- operative.

"I believe a large, strong farmer co-operative is the best option and I had to tell my buyer this. I feel guilty as heck about that but I had to tell him it was nothing personal."

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For Mr Gregan, the change to the dairy industry has been gratifying. "All I have to do is concentrate on producing as much milk as I can and I know I'm being paid the same as everyone else.

"With lamb you have to play the companies off against each other and hope you're going to get a better price."

Last year, in his first season, his production hit by drought and his income affected by start-up debt, he made more money than he had in the previous 10 years of sheep farming added together.

"I don't want to come across as a guy kicking the sheep industry as I leave. I'm still passionate about it. But it doesn't matter what prices you get unless you've got a structure where the whole industry is working together with one mind.

"The dairy industry, with Fonterra, has got that structure."